Lingou acquisition failed, terminal demand is unclear, Jingfeng Mingyuan's performance in 2022 is under pressure

On April 7, Shanghai Jingfeng Mingyuan Semiconductor Co., Ltd. (stock name: Jingfeng Mingyuan, stock code: 688368) held its 2021 annual shareholders' meeting. The shareholders attending the meeting reviewed 15 proposals, including the "Proposal on the 2021 Annual Report and Summary". Aijiwei attended the meeting as an institutional shareholder and voted in favor of the above proposals.

It is worth mentioning that this shareholders' meeting did not have a question-and-answer session. Jingfeng Mingyuan said that it had informed the shareholders' meeting by email before the meeting that only questions about the proposals would be asked. However, regarding Aijiwei's question about the sharp decline in net profit in the fourth quarter, the company said it would not answer it at the meeting and would arrange for communication after the meeting. However, as of press time, Aijiwei had not received any relevant arrangements from Jingfeng Mingyuan.

Emails from Jingfeng Mingyuan to communicate with Aijiwei before the meeting

Price increases supported a sharp increase in net profits last year, but terminal demand has already shown signs of decline in Q4

Since the beginning of this year, geopolitical and epidemic risks have increased sharply, terminal consumer demand has continued to be sluggish, and the semiconductor industry has gradually been shrouded in the shadow of "oversupply" due to the gradual implementation of wafer production capacity. In the secondary market, the A-share semiconductor sector has been "falling continuously". As of the close of April 7, Jingfeng Mingyuan's cumulative decline this year has reached 44.65%, a drop of nearly 70% from the peak closing price of 580 yuan on July 29 last year.

According to the 2021 financial report recently released by Jingfeng Mingyuan, the situation is also not optimistic. Although the company's overall sales revenue, net profit attributable to shareholders, and net profit after deducting non-recurring items increased by 108.75%, 883.72%, and 993.67% respectively compared with 2020, the fourth quarter revenue and net profit attributable to shareholders fell by 37.07% and 56.26% respectively from the previous quarter, and it was the only quarter in 2021 with a net cash outflow from operations (4 million yuan).

It is also worth noting that the financial report pointed out that due to the overall insufficient production capacity in the upstream, the company's overall product sales volume during the reporting period increased by 14.76% compared with the same period in 2020. At the same time, the product prices were adjusted. The increase in unit prices drove the comprehensive gross profit margin of the products from 25.45% in the same period of 2020 to 47.93%. This means that the company's full-year performance improvement is more dependent on the increase in ASP and depends on whether the increased costs can be passed on to the downstream.

From the perspective of revenue structure, although the company's main general/intelligent LED lighting driver chips, motor driver chips, and AC/DC power supply chips (DC/DC power supply chips have not yet generated revenue) all belong to the category of analog chips and are not easily affected by fluctuations in the business cycle of specific industries, the company's current product application areas with large shipments are mostly in consumer areas such as smart homes and fast charging, and the market fluctuates greatly compared to industrial control, automotive and other fields.

According to previous reports, industry insiders said that due to the rising political and economic risks caused by the Russia-Ukraine conflict and other issues, which have eroded the demand for terminal equipment, IC design companies are facing increasing pressure and need to lower their quotations.

The above news all indicate that it is not easy for IC design companies to continue to maintain high performance growth by raising prices in 2022. Even if more production capacity can be obtained as new production capacity is put into operation at foundries, the sluggish terminal demand will greatly limit performance growth.

As for Jingfeng Mingyuan, the proportion of general/intelligent LED lighting driver chips in its main business revenue is as high as 93.84%. Since its application scenarios are mostly in the consumer field, it is greatly affected by terminal demand, which will bring uncertainty to its performance. The company also admitted in its investor relations activities in March that it is expected that as the supply and demand relationship returns to normal levels in the future, the product gross profit margin will return to a relatively reasonable range.

Screenshot from Jingfeng Mingyuan's 2021 annual report

For Jingfeng Mingyuan, expanding the track to more stable industrial control, electric vehicle fields, or high value-added fields such as data centers may be an option to maintain long-term performance stability. This is also the reason why the company has increased its research and development efforts on AC/DC power chips and DC/DC power chips in recent years. At the same time, the company also tried to enter a larger track through more cost-effective methods such as mergers and acquisitions, but the results were not satisfactory.

The acquisition of Lingou ended in failure. The effect of expanding the product line is unlikely to be seen in the short term.

In June 2021, Jingfeng Mingyuan planned to acquire 95.75% of the equity of Nanjing Lingou Chuangxin Electronics Co., Ltd., whose main products are motor control MCUs. Its products will help the company improve the competitiveness of its overall solutions in the fields of variable-frequency ceiling fan lights and variable-frequency home appliances, expand the company's chip research and development capabilities in electric vehicles, servo control, power tools and other market segments, enhance the company's market competitiveness, and create new profit growth points.

The draft was officially announced on July 2. Influenced by this news, Jingfeng Mingyuan's stock price continued to rise throughout the month. On July 5, when the A shares opened, the stock price jumped directly from the closing price of 335.26 yuan per share before the suspension on June 18 to 402.31 yuan per share, and reached a peak of 580 yuan per share on July 29.

In October 2021, Jingfeng Mingyuan released a restructuring plan. Li Peng, Zhong Shupeng, Deng Ting, Zhang Weilong and Nanjing Daomi, as performance commitment parties, promised that Nanjing Lingou's cumulative net profit after deducting non-operating expenses in 2021, 2022 and 2023 would not be less than 160 million yuan. However, after the plan was formally submitted to the Shanghai Stock Exchange on November 4, it received an inquiry letter from the Shanghai Stock Exchange, requesting an explanation of the reasons and agreed basis for the target company's promised net profit in each year being higher than the forecast net profit.

In February 2022, Jingfeng Mingyuan released a revised restructuring plan, raising the performance commitment threshold that was once questioned, and promising that Nanjing Lingou's cumulative net profit after deducting non-recurring gains and losses in 2021, 2022, 2023 and 2024 will not be less than RMB 245 million. The corresponding net profit of the target company in each year during the performance compensation period will be RMB 30 million, RMB 50 million, RMB 80 million and RMB 85 million respectively.

However, shortly after the plan was released, Jingfeng Mingyuan officially announced on March 17 that it would terminate the asset restructuring. At a subsequent briefing, the company explained that it was "due to major changes in the recent market environment" and that the company would make further judgments based on factors such as the market environment, the development strategies of both parties, and operating conditions. At the same time, the company also promised that it would no longer plan major asset restructuring within one month from the date of the relevant announcement.

The unexpected failure of the highly anticipated acquisition project casts a shadow on Jingfeng Mingyuan's future plans and performance growth. According to the 2021 financial report, its motor driver chips and AC/DC power supply chips currently only account for 1.66% and 3.73% of its main business revenue, respectively. In terms of high-current DC/DC power supply chips for CPU/GPU power supply, although it has entered the customer sample delivery stage, it is still too early to increase volume.

It should be pointed out that the AC/DC power chip market has long been dominated by foreign manufacturers such as PI, Sanken, and ON Semiconductor, and the local matching rate is less than 5%. The market for high-current DC/DC power chips used in the CPU/GPU field is completely occupied by Infineon, TI, MPS, etc., and no domestic manufacturers have entered the market for the time being, which means that Jingfeng Mingyuan will face higher barriers if it wants to enter these markets with its own products.

Perhaps it is precisely because of these risks that Jingfeng Mingyuan's pace of acquisitions continues. In November 2021, the company acquired a 49% stake in Shanghai Xinfei. After the acquisition, the company held 100% of Shanghai Xinfei's equity, aiming to further strengthen the synergy between the two parties in the smart LED lighting driver chip and external AC/DC power management chip business, improve the company's operating decision-making efficiency, and increase profitability.

However, at present, against the backdrop of increasing uncertainty in the external environment, it remains unknown whether Jingfeng Mingyuan's "two-legged" approach will be effective.